New Labour has endangered occupational pension schemes, warns Jane Marshall. Jane Marshall is a partner and head of pensions at Hammond Suddards.
The importance of retirement provision has never been more recognised – but are traditional occupational schemes suitable with today's labour market and work patterns?
Pension provision is particularly tax efficient. Contributions paid by an employer are not taxable in the hands of the employee. Some estimate that a capital sum of at least 10 times the desired pension needs to be accumulated, and so the more money set aside the better – particularly for those employees who have left pension provision until mid-career.
With that background, common sense suggests that employers should play a greater part in pension provision. Indeed the Government acknowledges the need to get more employers to make top-up pension provision.
But tax changes introduced in New Labour's first Budget are provoking a backlash from employers, which could mean that adequate top-up pension coverage is likely to fall rather than to increase.
The removal of Advanced Corporation Tax (ACT) credit on dividend income has led to an increase in employers' costs in providing final salary schemes, where members' benefits are related to salary levels at or near retirement.
In money purchase schemes, where the level of employer contribution going into the scheme is fixed and members' benefits depend on investment returns, members will suffer, since the same level of contribution will provide less benefit.
The same applies to the self-employed, who have no alternative to money purchase provision.
In addition, changes to contracting-out rebates mean that a group personal pension unregulated by the Pensions Act is preferable to a contracted-out occupational scheme.
The message from the Government is therefore muddled.
It wants employers and individuals to do more – but it will not provide a system that encourages them to do so. It does understand that Inland Revenue restrictions mean that pension arrangements may be inflexible compared with other savings schemes, but it is not convinced that they should be changed, although it favours long-term pension savings which cannot be called on to meet short-term cash needs.
Will the Government's “stakeholder pensions” fill the gap? Probably not. They are designed to encourage those who currently have no pension savings to start a scheme that will top up state benefits.
But unless tax stability is maintained and the relationship between stakeholder pensions and occupational schemes is thought out, the new system may increase the pressure on employers to move away from their company schemes.
Some will not need much encouragement, given the extent to which employers' costs have risen as a result of increased regulation and taxation.
This is a shame because over recent years occupational schemes have become more able to deliver their prime objective – to recruit, retain and motivate employees.
Effort has been concentrated on ensuring that schemes deliver benefits which are right for the industry and the circumstances of the employer concerned.
In the banking sector, where employees are highly mobile and considered to be financially sophisticated, money purchase benefits conferring a high degree of employee choice are now the norm.
Schemes are also beginning to confront changing social circumstances, such as opposite and same-sex partnerships in addition to conventional married relationships. Practical ways of dealing with divorce are being refined, and early leavers are no longer an issue.
Company schemes are meeting their original objectives – and the collective provision they make for millions of employees can be delivered efficiently and cost effectively.
The development of pensions between employers and employees in partnership – which is what company schemes are – is also capable of being adapted to a pan-European context, if the political will is there.
The UK is the envy of many other EU nations because of the high level of its private pension provision and the comparatively low level of State pension which imposes a lower burden on the public purse.
It would be a pity if a system which has demonstrated its flexibility, resilience and effectiveness is damaged by well-intentioned political meddling.